What is an Administration Order?
A company can get an administration order from a court if it is in financial trouble and can’t pay the money it owes. It’s a legal way to rescue a company that still has a chance of surviving. The order appoints an administrator to take control of the company and try to save it. The administrator’s job is to see if the company or parts of it can keep going or if it needs to be sold to pay back what it owes.
Why Companies Get Administration Orders
Companies usually ask for an administration order when they’re out of money and can’t pay their bills or debts. This is called being insolvent. They might still have a good business overall, but a big problem like losing a major customer or dealing with unexpected costs has left them unable to pay what they owe. An administration order gives them breathing room to try to fix the problems and keep the business alive.
How Administration Orders Work
When a company gets an administration order, the administrator runs things. The administrator is usually an insolvency practitioner, which means they’re experts in helping struggling companies. The administrator looks closely at the company’s situation and financial problems and comes up with a plan for what to do next.
The plan could involve different things, like:
- Negotiating with the people and companies owed money (the creditors) to change payment terms
- Selling off parts of the business to raise money
- Finding new investors to put money into the company
- Agreeing to a Company Voluntary Arrangement (CVA) where creditors accept getting paid a bit less or waiting longer for their money
The Administrator’s Powers and Duties
The administrator has much power while the administration order is in place. They can do most of what a company director normally does, like signing contracts, hiring or firing staff, and deciding the company’s business strategy. The administrator also deals with the creditors and keeps them informed about what’s happening.
The administrator has a legal duty to act in the best interests of the creditors. This means trying to get as much money back for them as possible. Suppose the company can be rescued and continue trading. That would be great. But if that’s not realistic, the administrator’s job is to sell off the company’s assets in a way that raises as much money as possible to pay everyone it owes.
How Administration is Different from Liquidation
Administration isn’t the same as liquidation, when a company shuts down completely, sells everything off, and uses the money to pay its debts as much as possible. In administration, the starting goal is to see if the company can be saved and kept going, even if in a smaller form. Liquidation only happens if the administrator decides the company can’t be rescued.
The Aim of Administration
The number one aim of administration is to rescue the company if possible and let it keep trading. This could mean the original company carries on, or a new company buys the good parts of the business. If rescuing the company isn’t realistic, the next best thing is to get a better result for the creditors than they’d get if the company went straight into liquidation. For example, the administrator might be able to sell the business as a working operation rather than just selling off its assets separately.
Liquidation When Administration Fails
If the administrator can’t rescue the company or sell it and there isn’t a better option for the creditors than liquidation, liquidation is what happens next. The company closes down, all its remaining assets are sold off, and the money is paid out to the creditors in a strict order set by law. Secured creditors like banks get paid first, preferential creditors like employees owed wages, and then everyone else.
The Administration Process
Applying for an Administration Order
A company can apply for an administration order if it’s insolvent or likely to become insolvent soon. The directors fill out a court form explaining why an administration order is needed. The court usually hears the application within five business days once the application is filed. In urgent cases, the court might listen to it sooner.
The company chooses who it wants to be the administrator, but this must be a licensed insolvency practitioner. The administrator has to agree to take on the job.
Notice to Creditors
When applying for an administration order, the company must notify anyone with a floating charge over its assets, like its bank. It also has to notify any creditors who have threatened legal action to recover their debts in the last 12 weeks. These creditors can challenge the administration order in court if they think it’s not the right move.
The Administration Order
The administrator takes control immediately if the court agrees to make an administration order. Within 28 days, they notify all creditors that the company is in administration and invite them to submit claims for the money they’re owed.
The administrator follows their plan for rescuing or restructuring the company. They must send progress reports to creditors every six months. The initial administration period lasts one year, but the administrator can ask the court for an extension if more time is needed.
Exiting Administration
The goal is for the company to exit administration as soon as possible, either to continue trading in a healthy state or because it’s been sold or liquidated. If the administrator rescues the company, control passes back to the directors. If the company’s been sold, the administrator pays out the money raised to the creditors. Whatever happens, the administrator gives a final report on the administration to creditors and the court.
Pros and Cons of Administration
Pros
- It gives a struggling but viable company a chance to recover
- Creditors usually get more money back than if the company had gone straight into liquidation
- Suppliers are more likely to keep trading with the company than in liquidation
- Some jobs may be saved if the company or parts of it keep going
Cons
- The company loses control to the administrator during the process
- The administration is public knowledge, which can affect customer and supplier confidence
- If administration fails, the company will still end up in liquidation
- Creditors usually don’t get all their money back, even in a successful administration
